RBI decision to regulate digital lending is perfectly timed
The RBI has appointed a committee to suggest ways and means to regulate and monitor digital lending in a more comprehensive way. Is it essential to put regulatory curbs on digital lending and will it kill the nascent segment?
Lending rates are an issue
One of the big challenges that the RBI foresees in digital lending is the usurious rates of interest charged. In a way, it is becoming like the old money lending system being replaced with a digital alternative. Rates on digital loans tend to be as high as 25% to 30% per annum and for persons with a lower credit rating, it can be still higher. The problem is that many people borrow without realizing the consequences and eventually end up in a debt trap. The RBI wants to avoid such a situation, especially when rates are falling.
Strong arm tactics used
One standard refrain in recent months has been allegations of aggressive methods used by the recovery agents. Digital lending is a high risk business as it is done with limited background check and no collateral. In most cases, even the lenders have confessed that they do not have any other choice in the case of willful defaulters other than these kinds of strong arm tactics. While this is hard to regulate, the committee will work on a self-regulatory model so that such methods can be avoided altogether.
Need to know your lender
Just as there are KYC norms to know the client better, it is also essential to have norms to know the lender better. Typically, banks and NBFCs go through a stringent set of regulations including licensing and minimum net worth. On an ongoing basis, these banks and NBFCs need to adhere to norms pertaining to capital adequacy, asset provisioning and income recognition. According to RBI, the challenge today is that digital lenders are growing their lending in a decentralized manner without checks and balances. Hence a proper model of regulation will call on all digital lenders to register with the RBI and also be regulated on a continuous basis to make them more accountable.
Time to regulate is now
In the last few credit policies, the RBI has spoken at length about regulating systemically important NBFCs like banks and also regulating the cooperative banks at par with other SCBs. That will avoid the regulatory arbitrage and also the sudden winding up like in the case of PMC Bank. With the rapid growth in mobile access and better bandwidth, digital finance is likely to pick up in a big way. Digital lending is simple, elegant and quick. It is just that it had all the ingredients for a major implosion. The RBI has intervened to regulate digital lending at the right time. After all, it is always better to be safe than sorry!